The Rise and Fall of SunPower (SPWR)

Welcome to the 105th Pari Passu newsletter.

Today, we are back with another restructuring story: the demise of SunPower.

Founded in 1985, SunPower Corporation was a rising star in the nascent solar panel industry. With solar and storage solutions offering “customers control over electricity consumption and resiliency during power outages while providing cost savings to homeowners,” by 2020, SunPower was among the top ten solar panel providers in the United States. Yet, a faulty business model, tactical blunders, and macroeconomic headwinds made for a chronically unprofitable business.

After years of operating losses and restructuring efforts, including a spin-off of manufacturing capabilities, SunPower was forced to reckon with Chapter 11 by August 2024. The article explores how SunPower rose to the forefront of U.S. residential solar energy before its slow descent into insolvency. From a meme stock short squeeze to even the auditor throwing in the towel, the story of SunPower does not lack heat. Let’s dive in.

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The Rise of Sunpower

Founded in 1985 by Stanford Professor Richard Swanson, a pioneer in the commercialization of solar panels and namesake of “Swanson’s Law,” SunPower’s future was bright. By 1997, SunPower solar cells powered NASA's Pathfinder; by 2005, the company IPO’d under the SPWR ticker. With revenue growing at ~20% CAGR, SunPower was soon among the leading residential solar providers in the United States servicing over half a million homes across the U.S. and Canada. At its peak in 2021, SunPower was valued at over a $9bn market cap. [1] [2]

Up until 2020, SunPower boasted in-house manufacturing capability through its SunPower Technologies Segment. However, by August 2020, the segment was spun off as Maxeon Solar. Now headquartered in Singapore, Maxeon could better focus on cheaper international manufacturing options. Meanwhile, the spin-off reduced SunPower’s capital intensity, with capex run-rate drastically falling ~$100mm; FY2019 revenue was ~1.1bn and capex was $111mm. A Master Supply Agreement (MSA) preserved Maxeon panel supply for SunPower, preventing supplier disruption. The move was met with market optimism, with stock price jumping 15%. Yet, issues with Maxeon purchase obligations were yet to come, and SunPower was left solely as a downstream solar panel and energy storage contractor. [3]

Having sold their most valuable assets, SunPower’s main value-add was now as a leasing platform and project developer, generating revenue through either direct sale, leasing, or their financing platform:

1. Direct Sale: This constitutes the majority of SunPower's revenue, where they sell fully functioning solar power systems and storage solutions. The products are sold through a network of dealers and resellers as well as an internal sales team.

2. 3rd Party Leasing: Launched in 2011, SunPower’s residential lease program provides customers with SunPower systems under 20-year lease agreements including maintenance and 25-year warranty coverage. It is structured to be entered by the customer with third-party leasing partners, which are special-purpose entities SunPower neither controls nor consolidates.

3. Financing Platform: Launched in 2021, SunPower Financial is SunPower’s in-house financing company which supports direct sales with financing solutions such as loans arranged through third-party lending partners, in some cases for no money down. [4]

An important distinction to make here is that SunPower third-party developer partners not only source and sell to customers, but also purchase and own equipment from SPWR to make the sale. SPWR may provide technical sale assistance and sometimes uses an internal team as a selling channel, but SunPower does not take direct ownership of the panels and leases them out like Sunrun or Sunnova. Upon installation, SunPower’s direct economic interest is over. Direct sale is self-explanatory, and leasing agreements are sold off to special-purpose entities. Usually, ~65% of the payment to Sunpower is unlocked either when the contract is signed or upon installation, another 30% is received upon installation of solar assets, and the remaining balance is received upon connection to the grid. [25]

So, post-spin off, SunPower could effectively be viewed as a glorified solar warehouse, consultancy, and financing platform relying on third-party networks for nearly all aspects of operations. Leading up to bankruptcy, SunPower lacked both competitive edge and operating leverage, leaving them vulnerable to pricing squeezes from both the supply and demand side. From 2015-2023, SunPower on average saw annual revenues of ~$1.5bn, COGS of $1.3bn, SG&A of $277mm, and interest of ~50mm. Net income averaged -$236mm with capex averaging -$140mm. With SG&A regularly outpacing gross profit since 2015 and unfavorable unit economics — a 54% increase in sales from 2021-2022 mirrored a 63% increase in SG&A that same period — SunPower’s business has performed about as poorly as one might expect:

• SunPower has turned a positive operating profit only twice since 2014, with the slim FY2021 profit attributable to its Blue Raven acquisition. At the time of acquisition, Blue Raven was one of the fastest-growing residential solar providers in the U.S. with a geographic footprint expected to expand SunPower’s reach outside California. Moreover, even with demand acceleration in 2022 as energy prices skyrocketed over 30%—meaning SunPower could charge higher prices per watt—SunPower was barely breaking even on EBIT.

• In the past 10 years of operation, SunPower has not had a single year of positive free cash flow. Free cash flow has been almost entirely negative since 2004.

• ROIC has consistently been below WACC, and SunPower has never issued a dividend.

Long story short, SunPower’s business model has failed to create value for its shareholders.

Sacrificing profitability in the short-term may be excusable in order to capture market share. Sadly, this is not SunPower’s story. In 2013, Sunpower saw annual revenues of $2.5bn. By 2022, that had declined to $1.7bn. This represents a total decline of 31%, or approximately -3% annually, attributable to the sell-off of business segments in order to generate cash. Including Maxeon’s revenue of $1bn in FY2022—which, as a reminder, was SunPower’s divested manufacturing business—revenue would have remained largely flat at $2.7bn.

The Business Partners

Before tracing SunPower’s descent into Chapter 11, we must examine the major shareholders.

Back in June 2011, when fossil fuel companies fretted about the transition towards clean energy, French oil company TotalEnergies bought a 60% majority stake in SunPower for $1.4bn at ~46% premium through a friendly tender offer. The deal valued Sunpower’s equity at $2.3bn, Consequently, Sunpower became a majority-owned subsidiary of TotalEnergies Solar INTL SAS and TotalEnergies Gaz & Electricité Holdings SAS, both subsidiaries of TotalEnergies SE. On December 23rd, 2011, TotalEnergies entered a private placement agreement and purchased another 18.6mm shares of common stock at $8.80 per share for a total of $164mm, increasing total ownership to ~66%, with an implied valuation of Sunpower’s equity at ~$2.7bn [4]

By September 2022, TotalEnergies and TotalEnergies Gaz sold 50% less one unit of equity interests to the holding company GIP III Sol Acquisition LLC—a joint venture by TotalEnergies and Global Infrastructure Partners. Global Infrastructure Partners (GIP), is an infrastructure PE investor later acquired by BlackRock in January 2024. The transaction was structured as an exchange in private stakes, where TotalEnergies will buy a 50% stake in Clearway Energy Group (which owns 42% interest in Clearway Energy Inc) in exchange for a $1.6bn cash and 50%-minus-one-share interest in the TotalEnergies subsidiary that holds its 51% stake in SunPower, so exact valuations are not publicly known. However, we do know that by the time of bankruptcy, Total and GIP each owned approximately 25% of SunPower. [4]

Image Source: August 7th First Day Hearing Presentation [5]

Capital Structure

*The $1.53bn non-debtor funded debt obligations are linked to non-debtor SPVs associated with SunPower’s financing/loans business which also filed Chapter 11 and have been jointly consolidated for procedural purposes, but not substantively consolidated. [5][6]

Note that the debtor SunPower Corporation is the ultimate parent company of the nine other debtors in the ensuing Chapter 11 cases, along with a number of other non-debtor affiliates. [24]

Given how SunPower’s business profile does not make them an ideal lending partner, debt primarily consists of revolver and bank loans. By FY2021 end, SunPower had ~$574mm of debt and capital lease obligations, $123mm cash, and -$54mm in FCF. Annual interest 20154-2023 averaged around $50mm with EBIT of -$1390mm.

Storm Clouds: The Beginning of the End

Already a fragile and levered business reliant on government subsidies while nonetheless unprofitable, three problems arose to eclipse SunPower’s future…

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